Presenting a live 110-minute teleconference with interactive Q&A Sales Tax Audits in the Era of Digital Documentation Preparing for a Computer-Based Review Involving Electronic Invoices, Bills of Lading, Etc. THURSDAY, JANUARY 31, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Mark L. Stone, Managing Partner, Sales Tax Defense LLC , Deer Park, N.Y . Adam Rupp, Manager, Ryan , Philadelphia Andrew Sabol, Property Tax Administrator, Tax Technology Services LLC , Raleigh, N.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Sales Tax Audits in the Era of Digital Documentation Seminar Jan. 31, 2013 Andrew Sabol, Tax Technology Services LLC Mark Stone, Sales Tax Defense LLC asabol@ttsllc.com mstone@salestaxdefense.com Adam Rupp, Ryan adam.rupp@ryan.com
Today’s Program Introduction Slide 8 – Slide 17 [Andrew Sabol] Examples Of State Electronic Audit Rules Slide 18 – Slide 27 [Andrew Sabol] Practical Issues For Corporate Taxpayers Slide 28 – Slide 37 [Mark Stone] Planning For And Managing An E-Audit, As The Taxpayer Slide 38 – Slide 39 [Mark Stone] Client Experiences With Electronic Sales Tax Audits Slide 40 – Slide 43 [Adam Rupp]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7
Andrew Sabol, Tax Technology Services LLC INTRODUCTION
Audit Sampling All states that impose sales and use tax provide for some type of sampling of data in performance of audits. Authority for sampling varies between statutory and administrative. Revenue laws in most states give the tax agency the authority to base an assessment on the best information available. 9
Audit Sampling (Cont.) Approximately half the states enter into written agreements establishing the applicable sample methodology; however, not all agreements are binding. Sampling is most frequently used for sales and for purchases of expense items; all fixed assets for an audit period may be reviewed. 10
Manual Audits Prior to the widespread use of computers, the most typical sampling method was some form of block sample. An auditor undertook a physical review of all the sales/purchases within a selected period (usually several months) and projected a percentage of error for the entire audit period. Block sampling procedures are typically less formalized. 11
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Manual Audits (Cont.) There is less likely to be documentation establishing sample size and population prior to the audit. For larger audits, an auditor was usually required to visit a company’s location and might be on-site for an extended period of time. A taxpayer might have to address issues such as finding work space for the auditor, providing access to records, providing access to personnel, and providing equipment to access electronically stored information. 13
Electronic Audits Company and tax agency usually agree on the elements of sample prior to the examination. Statistical sampling is commonly used. Data is initially transmitted remotely or via storage media to the tax agency. The auditor may still make an on-site visit to review operations, and might have to visit a company location to access the documents agreed to be reviewed once the data is processed. 14
Electronic Audits (Cont.) If back-up documentation is digitized, the tax agency may allow electronic transmission of this data, further reducing the presence of agency personnel. States generally will have personnel dedicated to administering computer-assisted audits. These personnel are usually responsible for processing data and do not take part in the taxation review. 15
Advantages Statistical sampling is a more reliable and objective measure than block sampling of establishing tax liability. Quicker completion of audits benefit a company and the tax agency. A tax agency official spends less time at a company’s location. 16
Advantages (Cont.) A written agreement is evidence, if an appeal occurs. A company still retains the ability to object to an assessment, although it may not be able to dispute agreed-upon sampling parameters. 17
Andrew Sabol, Tax Technology Services LLC EXAMPLES OF STATE ELECTRONIC AUDIT RULES
State-Specific: California California publishes an audit manual that has a chapter (13) devoted to computer-assisted audits. A company is encouraged to interact with audit staff in the development of the sampling plan. An auditor is to take into account underpayments and overpayments. Form BOE-472, Audit Sampling Plan, is used to document the sampling plan and set the audit criteria. 19
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State-Specific: Texas Texas publishes a brochure with information for conducting computer-assisted audits, and a sampling manual. Two programs in place: CAMS-Mainframe and CAMS-PC. CAMS-Mainframe is a traditional electronic program for large numbers or records, when data is transmitted or sent to the agency. 21
State-Specific: Texas (Cont.) CAMS- PC is a program installed on an auditor’s computer and that allows the auditor to run the program. It is designed for smaller numbers of records. Included in the records used are the following: General ledger detail files, purchasing data files, sales invoice detail files and vendor/customer master files. 22
State-Specific: Illinois Illinois publishes Publication 107, Electronic Records and Computer Assisted Auditing. The revenue agency will review a company’s electronic records to evaluate eligibility for an electronic audit. Agency may conduct a system integrity audit to attain an acceptable level of confidence in the EDI process. 23
State-Specific: Illinois (Cont.) The revenue agency and taxpayer will conduct a conference to establish an audit plan. The agency then will conduct a computer system review, and there will be an overview of the sampling guidelines and techniques. 24
State-Specific: Massachusetts Massachusetts publishes a Guide to Computer Assisted Audit Techniques. The revenue agency uses a computer audit questionnaire to gather information needed to conduct the audit. Agency uses storage media and secure e-mail to transmit data. 25
Resources In This Area Federation of Tax Administrators - www.taxadmin.org Sampling for Sales and Use Tax Compliance California Board of Equalization - www.boe.ca.gov Sales and Use Tax Audit Manual Texas Comptroller of Public Accounts - www.window.state.tx.us 96-334 – Computer Assisted Auditing Brochure and Texas Sampling Manual 26
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